Taking a look at the data this week gives us an insight into recent moves in markets, where we saw the VIX spike with a bullish S&P500 the week before last and equities selling off the last week.
With the USD giving us the potential for a reversal and no news is bad news on fiscal expenditure there is a deflation vs inflation scenario where the perceived future actions of the US Fed are up for question.
Until recently we have seen the inflation scenario dominate, in which equities, commodities and gold/silver are bid while the USD is weak.
As shown in the data this week, during which we have seen equities retrace from their high, volatility increase, commodities have mixed results with energy weaker and lumber retracing significantly.
The markets the last week are daring US policy-makers to come good on their implied promises, of fiscal stimulation as well as future monetarist interventions.
Global markets are threatening a reversal of the relentless bid in risk assets, showing up in a reversal in big tech assets, the NASDAQ, the S&P500, bitcoin and digital assets with a potential bid pushing the USD higher.
With the last weeks moves more deflationary the US Fed has been laying the ground lately to pursue a major policy shift into pursuing inflation for its own sake as the fiat currency and inflation growth model – in some ways a key to commerce and the post-war conception of capitalism worldwide – begins to face off its potential demise.
Deflation, or negative interest rates or out of control inflation through intervention all accelerate an end-game after a rich history of intervening in the financial system with pro-cyclical monetary policy towards these terminal ends. Basically, the relationship between the price mechanism and policy has become increasingly linear to the exclusion of everything else, but in a way in which each intervention since the 90’s has developed the need for more intervention – and the sums have increased exponentially.
So although it’s hard to see whether deflation or inflation plays out for the time being and of where asset prices play into these expectations, the official policy response has been announced – that the US Fed will prioritise inflation. Markets could sell risk and be deflationary until this intervention, but it is hard to imagine a proper move lower without actual events forcing them to abandon the idea of the Fed put. Potential events could be persistent deflation, problems in debt/credit markets or financial contagion.
Digital assets were sold hard over the weekend, wiping out significant gains in many tokens with losses upto 50%. Having bounced back a little the last 24 hours, some assets are faring better than others. Please see our morning email for more information.
Bitcoin has traded as much as 20% from its highs in the recent pullback and is still trading within its long-term uptrend, but threatening to fall into its longer-term consolidation.
On the weekly chart below, we highlight where bulls should consider bidding (x) compared to where Bitcoin could be headed (red box) in a more bearish scenario.
Although Bitcoin had been more correlated with gold recently, it led the risk-off move in equities. Whether it is a healthy pullback to the trend-line in a top-heavy market, or whether equities selloff more and Bitcoin trades back into its longer-term consolidation remains to be seen.
BTC/USD Chart – Daily
Volumes were higher the last week than they had been for the month before, but not especially high historically.
BTC Dominance Daily
The longer-term dominance chart is in a downtrend, which we take a better look at on the 4hr chart.
BTC Dominance Chart 4hr
Our options for interpreting the 4hr chart is either within a bearish down-trend channel (blue lines) or with a bullish reversal (red box).
The U.S. dollar has been key to a lot of the moves this year, trading lower with a higher equity market and vice versa. The asset is likely the key to the mix of assets currently sitting in indecision.
The USD index is either forming a type of flag-consolidation that would see it trade to around 86-88. Alternatively, it has recently made a low to reverse and trade higher.
Taking recent equity weakness into account puts the counter-trend narrative (USD higher, Equities lower) back onto the agenda. If we look at the 1hr chart we can see that USD has not traded out of its pattern yet.
The longer-term gold chart shows an asset with increasing interest over time, however the most recent move could be the market ahead of itself.
Questions for gold include whether the asset trades with or against a USD move higher or if it simply does its own thing.